Great blog posts about macroeconomics

China Cuts Required Reserve Ratio

In response to economic data published last week which stated that the Chinese economy grew at 7 percent for the first quarter of 2015, the lowest since 2009, the Chinese central bank has reduced the required reserve ratio by 1 percent. This should free up around 1.2 trillion yuan (194 billion dollars) to be loaned in the Chinese economy. This is the second time that China has done this, the last time being in February of 2014. This act of stimulus highlights the slow down occurring within the world’s second largest economy. In the U.S. growth of 7 percent would be unprecedented, but in the growth-centric Chinese economy they need large GDP growth to continue developing for the more than 1 billion Chinese, including millions below poverty. Impressive growth legitimizes its communist rule and keeps Chinese content with their domestic situation.

China’s change in the reserve ratio should have the desired effect so long as banks see a favorable lending climate and are willing to lend to the limit of the required reserves. If however the slowing of growth in China continues then banks may be more apprehensive to loan and may keep more reserves than the required ratio, at which point the change in reserve ratio is no longer an effective stimulus. From then on active monetary and fiscal policy may be needed to stimulate growth. While its not possible to predict the outlook of the Chinese economy, it is certain that at some point in the near future 7 percent+ growth will not be feasible and their economy and policies will need to shift.

3 thoughts on “China Cuts Required Reserve Ratio”

Because China was not using its full potential of resources until recently, its growth per year has been massive compared to the US. But this is because before, they were so under developed that any capital that was put in the country would make a huge difference, and it did. China became one of the fastest growing economies in the world, and now is one of the largest economies in the world, if not the largest. Still, the country is growing at a rapid rate, but perhaps this is showing a slowdown. China could become like the US which has an average growth around 2-3% in GDP per year and plateau at that rate at some point. China could show a similar path like the Asian Tigers, in which that had rapid growth for two decades or so and then because highly industrialized economies and countries.

It will be interesting to see whether or not that this decrease in the required reserve ratios will stimulate the economy in the coming months, or if Chinese banks will =adopt policies that U.S. banks have since the recession. Since the Great Recession, U.S. banks have held much more than the required reserves for fear of lending to unreliable borrowers. I do not know if China faces this same issue, but if the economy continues to slow down its growth, I guess unreliable borrowers will be inevitable. Hopefully they can learn from the U.S. and not cause a recession in their country due to an excessive of loans to unreliable borrowers. This would inevitably hurt the U.S. economy.